Sunday, December 11, 2011

On environmental issues, businesses need government leadership

I've been wanting to write something about the Durban Climate Talks that was something more than the morbid curiosity with which I watch humanity choosing to cease to exist à la Easter Islanders by destroying all of the earth's natural systems on which we rely for survival. I like a lot the personal perspectives of my friend, Jo, who is attending the meetings. In the end, of course, countries decided to push our survival to the limit by agreeing to do something after 2020. Scientists say it will not avert catastrophic climate change and somewhat surprisingly for a country that already suffers extremely badly from the effects of climate change, India, were villains (who needs to drink water from the mountains anyway? and why should we care about monsoon patterns anyway?). All this is rather bad economics.

Thankfully, some companies are doing their best to go green despite a lack of Government leadership. But they are doing less than they otherwise would. One of the reasons is that they don't know what the standards will be and there are costs associated with setting standards only to have to change them. For this reason:

Of 300 bosses of big global firms recently quizzed by Ernst & Young, 83% said they wanted to see a legally binding multilateral deal struck in Durban to update the ailing Kyoto protocol and help to put a price on carbon emissions. But only 18% expect this to happen. The absence of a clear climate policy helps explain why, for example, investment in British clean technology fell from around $11 billion in 2009 to $3 billion last year. It would also suggest that any firm factoring a steep carbon price into its plans—as Shell does, assuming a notional price of $40 a tonne—should quietly lower it.

(see FULL ARTICLE in The Economist)

This applies in particular to new technologies such as that associated with electric cars. Israel is reportedly doing very well because the Government has already defined standards. Why invest in a system of recharging or changing batteries when the country may change standards? This partly explains why other countries are doing less well in this field.

A few companies fight against change. For example BA announced that an air duty rise will cost jobs. They are correct. But only in the short run and the alternative is far worse or, at least, far more expensive.

So there are two reasons why Government leadership is necessary: setting standards which are predictable and, applicable to everyone (fair competition) and forcing companies to adjust to the changes rather than fight them.

I recently read a book about the impact that humans have had on the environment and what the planetary limits are in different areas now and what can realistically be done. I recommend as essential reading The God Species: Saving the Planet in the Age of Humans by Mark Lynas. There is also an excellent interview with him on The Guardian's Science Weekly(I had pre-ordered this book in fact, and I plan to write a full review of it when I get time.)

He talks in great detail about the CFC (ozone layer) crisis. It is somehow seen today as if this was an easy one to fix but in reality it was far from easy. Governments needed to be strong armed into agreeing. Industry tried to resist saying that there was no alternatives.

Of course, any argument suggesting we could no longer have fridges or deodorants make people think twice. Indeed, I believe that all arguments saying that people's lives would be significantly worse following action to prevent climate change are doomed to failure. But this didn't happen. The industry developed new technologies and I am happy to report I as I write, I am sipping on a beer kept chilled in my fridge and smelling very nice, thank you very much.

The point is that clear legislation and leadership by Government gives industry an incentive to innovate. It gets around the short term profit motive. It gets around the risk of losing business if you go green but your competitor does not. It gets around the standards problem. Governments need to lead to avoid collective action failure (tragedy of the commons) and to create a level playing field.

And we need to have faith in human nature and the dynamism of the private sector to find solutions without lowering living standards. But this will only happen with Government leadership in the right areas (and, obviously, not interfering in business in the wrong areas).

One of the major justifications for having Governments at all is the ability to correct a collective action problem. In Durban they have failed and they all lose some legitimacy for this.